Understanding how derogatory marks are made on your credit report helps you take action now to prevent them from hurting your credit score in the future.
What is a derogatory mark on your credit report?
It sounds outright offensive, but a derogatory mark on your credit report may not mean what you think it means. Put simply, these marks appear on your credit report and express that you have an account with late payments or items that are at credit risk. These are both indicators from lenders that believe they may never see the money you borrowed returned and might take steps to get as much of their money back as they can. Derogatory marks are reported to credit bureaus by lenders and can impact your overall credit score.
It's important to check your credit report regularly to ensure you haven’t missed something important that is dragging your score down without your knowledge. The most common kind of derogatory mark is a past-due payment that is more than 30 days tardy.
Foreclosures, repossessions, and bankruptcies will also lead to derogatory marks. They will stay on your credit report for seven years, with the exception of some bankruptcies, which stick around for a full decade.
How do derogatory marks impact your credit?
Derogatory marks can drastically lower your credit score. If you already have a low score they won’t drag you down much further. However, if your score is good or great, you run the risk of quickly losing 100 points or more.
Lenders will look at your past credit behavior to suggest how you may behave in the future. A lowered credit score and a derogatory mark on your credit report can impact your ability to secure loans down the line. These marks suggest to lenders that you are a higher-risk recipient who is unlikely to pay back what you owe. For example, if you’ve had a car repossessed, it may be harder to get approved for a loan to purchase another car in the future. If a house you own goes into foreclosure, banks may be hesitant to approve you for a mortgage in the future.
What are some common types of derogatory marks?
Derogatory marks on your credit report will negatively impact your credit, but the exact impact, and how much your score will drop, depends on the severity of what has occurred, compared against other existing information in your file. Here are examples of some of the most common marks and what causes them:
Late payments will appear on a credit report if you have missed a payment for more than 30 days.
Collections occur when a lender doesn’t see payments on a loan for an extended period of time. Past a certain point, they have the option to send or sell your debt to a debt collector. You will first need to verify that your debt has been officially sold, then make a payment plan with the agency that purchased it to settle the debt. This won’t get a derogatory mark on your report taken off, but it will remove your risk of being sued.
Charge-offs are put into place when a creditor considers the money they lent to you gone and closes your account. This can happen when your payments are outstanding for more than 180 days. If this occurs, you can still try to pay back the debt by negotiating a payment plan or settlement with a creditor.
Bankruptcies stay on your credit report for an average of ten years. Even though the term can sound worrisome, you can still rebuild your credit over time. Ten years is a long time, but it’s not forever.
Foreclosures happen when you fail to make mortgage payments on a house that you own, and the bank seizes it from you. When a foreclosure happens, it is reported by banks to credit bureaus. If you miss payments on your home for multiple months, foreclosure is one option a bank may take to recuperate some of its losses.
Repossessions may come about if you put up assets, like a car, up for collateral on a loan, and then miss the payments. In this case, creditors may appear, often without warning, to repossess these assets. If something like your car is repossessed, expect to see your credit score drop between 50 and 150 points, depending on your other financial circumstances.
Judgments come from courts and are a decision made that settles a dispute between two parties. Something like a bankruptcy judgment appears as a derogatory mark on your credit. The judgment you receive will not always appear on your credit report, depending on what kind of ruling it is and where you live.
Tax liens are imposed by law on a property to secure tax payments. Liens can be placed on your home or car, and if you fail to pay them, can lead to repossession and foreclosures, all of which have a negative impact on your score and cause derogatory marks on your credit report.
How do you check your credit report for derogatory marks?
It’s important to regularly monitor your credit report and watch for derogatory marks, so you can handle them as soon as possible to avoid your credit score from plummeting.
Equifax, Experian, and Transunion are the three major bureaus in Canada. Most Canadian credit bureaus buy their credit information from FICO, a U.S.-based data analytics company focused on providing credit scoring services.
Most credit bureaus allow you to check your credit report and score online for free and provide monthly updates. Other institutions can also help you get a copy of your report for free, but they may only detail your financial history, and not show your score. If you’re just looking to check quickly, many banks offer in-house “soft” credit score assessments, which aren’t official records, but are easily accessible by downloading their mobile applications.
How do you address and remove derogatory marks?
Sometimes, a derogatory mark on your credit report may have been made fraudulently or in error. Addressing these inconsistencies can sometimes lead to their removal from your report. If you see accounts you don’t recognize or incorrect personal information on your report, this may be indicative of a mistake. Contact your lender or credit issuer to start the process of filing a dispute. Then, compile the necessary documentation, including verification of your identity and a list of the charges you allege are errors, and submit them to your creditor.
It is also possible to negotiate solutions with creditors and credit bureaus to prevent your score from experiencing a catastrophic drop. If you have historically had good behavior and are experiencing financial difficulties, try calling your lender to negotiate a hardship plan. You may also consider writing a goodwill letter to lenders, which explains why your payment was late and asks the creditor to take the mark off of all your credit reports.
You also have the option to ask a professional for help. Not-for-profit credit counseling agencies can provide you with free advice to help you deal with credit agencies and other lenders. Depending on the service, they may also be able to help you consolidate some of your debts by making phone calls to lenders on your behalf.
It may feel impossible to rebuild your credit after getting derogatory marks, but it’s not! These marks most typically appear when you fall behind on your bills. Step one, pay them. After that, the simplest way to take an active approach to building better credit is to use what you have responsibly over a long period of time. To monitor your progress, consider trying KOHO’s credit-building tool that helps Canadians build their credit for only $10 per month.
Morgan Sevareid-Bocknek is a Toronto-based journalist. She is an investigative reporter at the Toronto Star and has reported for The Associated Press and The Globe and Mail.